Saturday, 11 February 2017

The Student Loan Book Sell-Off: The Need for Supervision

It was announced
last week that the U.K. Government has decided to sell a certain amount of
student loans to private entities, in the hope of recouping up to £12 billion
for the national coffers. The first sale, which covers a selection of loans
which entered repayment between 2002 and 2006, is the first in a four-year
programme of sales covering loans issued before 2012 (when the value of the
loans dramatically
increased). In this short post, we will see that there is an increasing
amount of opposition to this sale, from a number of standpoints, and that there
needs to be an increased level of scrutiny after the sale has been completed.
It has been recognised that the previous sales of ‘tranches’ (French for ‘slice’)
of the student debt have resulted in incredible and serious errors, which when
understood in combination with economic concerns regarding the value or worth
of the sale to the taxpayer, means that there must be an increased level of
scrutiny from all concerned, including students who have taken the loans out themselves.

From reading the Government’s press
release, it is clear to see the motive of this sell off. Universities,
Science, Research and Innovation Minister Jo Johnson stated that ‘the
Government is committed to bringing public finances under control, and
returning the budget to balance’ – which is a constant
rationalisation for the Government’s actions, rightly or wrongly, although
this understanding has
been challenged – with Chief Secretary to the Treasury, David Gauke, adding
that ‘The autumn statement reaffirmed our commitment to the sale of the student
loan book if market conditions were favourable and I’m pleased the timing is
now right to start the process’. However, this justification has not placated
the torrent of criticism that has come the Government’s way, which may be
difficult to disagree with when we understand the Government’s track-record in
selling off the student debt.

There are two aspects, in
particular, which should raise concern. Firstly, the Government has been
heavily criticised in recent times regarding student loans, and its retroactive
altering of terms. Although not directly
related to this issue of selling the loan book, it alludes to a government that
is not on the side of student borrowers. Arguably, the reason for such disdain is
simple, because as the Financial Times said in a recent headline: ‘Two-thirds
of UK students “will never pay off debt”’ – this, apparently, gives the
Government the right to misinform borrowers and change the terms of their
financial arrangement after the
arrangement has been agreed (a practice which, if performed by anyone else,
would result in penalisation). Secondly, the previous sell-off of the pre-1998
loan book, to the private firm Erudio,
resulted in headline-grabbing
stories like the firm sending letters to graduates demanding early repayments, even though they had not breached the
earnings threshold for repayment, and despicably sharing borrower’s details
with credit reference firms, despite the promise that student loans would not form part of a person’s credit
records. It is for this reason alone that the Government has, this time, been
at pains to confirm that ‘unlike these previous sales the income contingent
loans included in this sale will continue to be collected by HMRC and SLC
(Student Loans Company)’. Whilst this seems appropriate, it does not address
how the instance of private investors pressuring the SLC to do more to recoup
loans may be countered.

There are, however, those who
support the sell-off. One aspect of the support for the sell-off is based on
the promise that the Government has made regarding the inability to alter the
terms after the sale, which has been noted
as potentially being a better deal for borrowers than as seen in 2015 with
George Osborne’s retroactive meddling. Yet, the potential for a positive
outcome to this story is extremely limited. The Economist notes that taxpayers
will lose out because the Government is simply swapping a future cash-flow for
an immediate cash-flow, but will pay
for the privilege.

Ultimately, the Government’s
decision to sell the student debt is its own to make. However, the warning
signs are there for a number of parties. The warning signs are there for the
Government and the Taxpayer, because as we saw with the selling of the Royal
Mail, as just one example, it is notoriously difficult to get the right
value for such a high-profile and complicated sale. The warning signs are
there for borrowers, because the previous attempt to sell the loan-book was an
administrative and PR disaster, which pales in insignificance next to the lack
of integrity demonstrated by the Government in dealing with student debt in the
first place. What these warning signs mean is that regulatory bodies, like the Ombudsman for Financial Services
and the Financial Conduct Authority need
to remain hyper-vigilant against abuses of this important transaction. Finally,
borrowers themselves must remain vigilant because the previous stories
regarding borrowers being unaware
of how much they owe will be repeated. The debate about 17 and 18-year olds
tying themselves to such an intricate and long-standing financial commitment is
best saved for another platform, but students need to pay more attention to a
borrowing system that is geared against the less-vigilant borrower.

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